TOPIC 5

BUDGETARY CONTROL

Topic 5- Budgetary Control (ZA/SEPT/2014) 1

Role of Management Accounting in Planning &
Control
Budgetary Control Process
Decentralization and Budgetary Control
Responsibility Accounting
Goal Congruence with National Planning (OPP &
RMK)

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 Budgetary Control Process
 Budgetary control is the establishment of a budgeting
system to formulate financial action plans for the
operations of an organisation and the system to direct
such finances to achieved the desired actions specified
in the budget
 It is a control technique whereby actual results are
compared with budgets.
 MOF is responsible for the national budgetary control
to ensure that the expenditure of the country as a whole
are always within the available resources of the country

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Budgetary Control Process
 Responsibility of the budgetary control lies with
the respective head or CO of such organisations.
 The CO are expected to ensure that their
expenditure are within the planned budgets of the
organisations.
 Any positive or negative variances are determined.
 Report are to be prepared to the appropriate
authority of any situations that might cause a
change in the expected outcomes of the budget

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 Features Budgetary Control System
The organisations are broken down into various responsibility
centres where each centre is to carry out identified activities. A
detailed plan is formulated into a comprehensive budget
The objectives, output and outcomes of the organization are
used as the bases of measuring performance
A performance indicator is developed to monitor and evaluate
the performance and progress of each responsibility centre of
the organisation
A continuous performance evaluation is carried out to
determine the performance of the organization (output or
outcomes) in comparison with the budget

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Budgetary Control Process
 Budgetary control acts as a deterrent against
misappropriation of funds. Rules establish procedures,
but they also establish the boundaries of behaviour.
 Control assumes that expenditure must agree with
appropriation. Appropriation expresses the intent of the
authorising agent or the legislature.
 Control maintains information about expenditure to
preserve an audit trail.
 The first requirement of a good system of budgetary
control is to set up accounts for collecting data on inputs
and outputs at the lowest distinct level of activity.
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Types of Budgetary Control
 Fund Control
This type of control refers to the procedures set up to ensure that the
fund is properly kept and used in the right way.
 Revenue Control
This type of control refers to the procedures set up to ensure the
collection of revenues of the governments are from properly identified
sources, there are proper monitoring of such collections and the
revenues collected are accounted for properly in the correct funds and
proper books of accounts.
 Expenditure Control
This is the control procedure within the spending organisation to
ensure that all spending is done exactly for the purposes that has been
agreed. This is also known as Vote Control and is exercised by the
accounting officer of the organisation.
 Cost Control
This is the control procedure to ensure the total cost incurred for any
activity of an organisation is within the right valuation.
Types of Budgetary Control
Cash Control
This type of control ensures that spending plans for a period are
made by a department based on approved vouchers. Cash
forecast need to be done to avoid any overspending request that
would lead to deficit.
Payment/Disbursement Control
This procedure is to ensure that payment for any activities
through preparation of payment vouchers is properly
authorised.
Salary/Payroll Control
This control is to ensure that right amounts are paid to the
right people in the organisation and at the right time to avoid
fraud and payment to non-existing workers.
Advantages of Budgeting and
Budgetary Control
 Requires and forces management to think about the future, to look ahead,
to set out detailed plans for achieving the targets for each department, and
to anticipate and give the organisation purpose and direction.
 Promotes coordination and communication.
 Clearly defines areas of responsibility where managers of budget centres are
to be made responsible for the achievement of budget targets for the
operations under their personal control.
 Provides a basis for performance appraisal where actual performance is
measured and assessed. Control is provided by comparisons of actual results
against budget plan. Deviations from budget can then be investigated. The
reasons for the deviations can be divided into controllable and non-
controllable factors.
 Enables remedial action to be taken as variances emerge.
 Motivates employees by participating in the preparation of budgets.
 Improves the allocation of scarce resources.
 Economises management time by using the management by exception
principle.
The Concept of Decentralization
 The concept of decentralization is the key concept related to the
devolution of higher authority to the lower management

 Decentralization is also indicated by freedom, differentiation and

responsiveness (Caldwell, 2003). It includes demand for less control
and uniformity that subsequently reduce the size and cost associated
with maintaining a large central bureaucracy.

 The concept of decentralization began in the late 1960s and 1970s in

many western countries such as England, United States and Australia.
This reform took placed in the government sectors which moved from
the conventional style of bureaucracy.

 Decentralization was identified as a tool for more effective decision

making while delegating autonomy and responsibility to the lower
management level specifically for those who are accountable
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The Concept of Decentralization in
Malaysia
 The financial management of the public sector in Malaysia was largely
influenced by developed countries such as England and Australia.
 It is bounded by regulations namely Federal Constitution (96-112),
Financial Act 1957, Audit Act 1957, Local Government Act 1976,
Treasury Directives, Treasury circulations and accepted accounting
principles such as GAAP and IAS.
 The financial management of the public sector is significantly affected
by the country’s annual budget which sets up the flow of income and
expenses forecast for the next year. Under the public sector paradigm
shift from the Progressive Public Administration to New Public
Management, Malaysia has been practicing the Modified Budgeting
System (MBS) since 1990.
 MBS was believed to bring evolution to the country’s budgeting
system with a distinct shift toward output orientation and greater
delegation of authority. It has strengthened the concept of ‘Let
Managers Manage’ previously introduced in the PPBS which makes the
lower level management more accountable and responsible.
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 Responsibility Centre
Government departments are recognized as Pusat Tanggungjawab (PTj)
or Autonomy Centres (Responsibility Centres) and have their own
accountability and responsibility in managing financial resources based
on their stated programs and objectives.
Among the characteristics of decentralized financial management being
practiced under PTj were responsibility based on the given authority
and improved decision making through better budgeting process and
decrease of bureaucracy.
 Individuals under this system have their own role to contribute to a
better financial performance within the cooperation and guidance given
by the higher authority.
The measurement was based on the achievement of the outcome rather
than the input being delivered. Thus, the financial performance
depended on the PTj initiative which could subsequently create
entrepreneurship among its members. In
Malaysia, the financial decentralization reform has widely spread to
include a small institution such as public schools.

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Responsibility Centre
 A responsibility centre can be defined as any functional unit in an
organisation headed by a manager who is responsible for the
activities of that unit. These enable managers to monitor
organisational functions.

 There are four types of responsibility centres

a. Revenue centres - an organisational unit in which outputs are
measured in monetary terms but are not directly compared to
input costs.
b. Expense centres - an organisational unit where inputs are
measured in monetary terms but outputs are not.
c. Profit centres - an organisational unit where performance is
measured by the difference between revenues (outputs) and
expenditure (inputs).
d. Investment centres - an organisational unit where outputs are
compared with the assets employed in producing them.
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Responsibility Centre
In Malaysia, to assist responsibility centres in their
budgetary control and management of expenditure
and subsequently enhancing efficiencies in financial
documents preparation, a system known as e-SPKB
was introduced. e-SPKB is an abbreviation for
Electronic Budgetary Planning and Control System
and it is an accounting systems used to control the
budget.
Budget Virement Policy
The purpose of this virement policy is to put in place
a formal system of approval for such changes. It also
assists Chief Officers and Budget holders in the
fulfilment of their budgetary responsibilities by
setting out the rules under which resources can be
transferred within a single budget or between
budgets.
By NHS Central Lancashire Governance Committee
Budget Virement Policy -Definition
Virement means moving budgets between different budget lines.
A Budget is an annual sum of money identified for a defined
purpose within which expenditure has to be managed.
An Account Code (or Expense type) is a single line within a
budget which identifies a specific type of expenditure.
A Chief Officer is a Director appointed by the Chief Executive to
manage the income and expenditure for the totality of services
within the area of their responsibility.
A Budget Holder is a manager appointed by their Chief Officer
to supervise budget within the totality of their service.
An Authorised Signatory is an officer appointed by the Budget
Holder to sign for income and expenditure on their behalf up to a
designated amount. Responsibility for the budget remains with
the Budget Holder(s).
Appropriate Use of Budget
Virements
Adjustments to reflect changes that could not have
been foreseen at the start of the year.
Where planned actions by managers mean that
resources previously allocated for one purpose are no
longer required for that purpose and are used for
another agreed purpose.
Budgets adjusted for specific CRES schemes.
Movement of Reserve budget to fund specific
initiatives.
Virement Rules and Processes
Virement is not permitted from non-recurrent to recurrent
expenditure.
Virement is not permitted where the PCT would be committed
to additional recurrent funding in excess of commitments
agreed within the PCT’s financial plans.
A virement form can be raised by releasing budget holders or
finance staff following the approval of budget movements. This
can be authorised indirectly by email or directly by signing the
form.
Where virements would increase management costs of the PCT
overall, budget holders must seek approval from the Director of
Finance before processing it.
The Chief Executive or Director of Finance have the authority to
manage budgets corporately, this may include budget virements
decided strategically.
Benefits of Budget Virement
To keep appropriate control over changes between
different Budgets and to support budget holders in the
fulfilment of their overall budgetary responsibilities.
To assist in advising on the reported financial position:
If budgets are to be effectively managed it is essential
that throughout the year the Chief Officer and the
Director of Finance have a shared understanding of the
true position.
To support compliance with Standing Orders (SOs),
Standing Financial Instructions (SFIs) and Tender &
Contracting (T&C) Procedures.
Current Issues
 The Five Years Development Plan is the nation comprehensive
strategic development planning. Starting from the 10th Malaysia Plan
(2011 – 2015), government focuses on steps to build up strong
foundations for the national networking economic safety through
introduction of the Outcome Based Approach (OBA).
 All Ministries and government agencies have to ensure that the
philosophy and main policies of the government are used as guidelines
in planning the expenditure based on the principles of utilising the
resources efficiently in order to stimulate economic growth, thus
achieving value for money.
 Among the current policy and main initiatives that the government has
to focus in the 10th Malaysia Plan include the New Economic Model,
Government Transformation Programme (GTP), National Key Result
Area (NKRA), Economic Transformation Programme (ETP), National
Key Economic Area (NKEA) and National Blue Ocean Strategy (NBOS).

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Current Issues
To accomplish the status of developed countries by the year
2020, government has introduced Economic Transformation
Programme (ETP) with 12 National Key Economic Area (NKEA)
lead by the private sector.
The government will be the main facilitator and will strengthen
the civil service delivering system through the Government
Transformation Programme (GTP).
Planning and implementation of programme, activities or
project should take into consideration the outcome and impact
factors together with the performance evaluation elements such
as key result area (KRA) or key performance indicator (KPI). The
purpose is to increase efficiency in public spending thus helping
in evaluating achievement of government policies or initiatives.

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